ARCHIVED -  Telecom Decision CRTC 87-13

Telecom Decision

Ottawa, 23 September 1987

Telecom Decision CRTC 87-13

CELLULAR RADIO - ADEQUACY OF STRUCTURAL SAFEGUARDS

I BACKGROUND

In Cellular Radio Service, CRTC Telecom Public Notice 1984-55, 25 October 1984 (Public Notice 1984-55), the Commission determined that Cantel Inc. (Cantel), the company designated by the federal government to provide a national cellular radio-telephone service, and the cellular radio affiliates of any federally regulated telephone companies would not be required to file tariffs for the provision of cellular service. In the case of telephone company affiliates, the Commission's decision not to require the filing of tariffs was conditional on there being adequate safeguards in place to ensure that cellular activities are conducted at arm's length from, and are not cross-subsidized by, regulated telephone company activities.

On 13 March 1984, the Federal Minister of Communications (the Minister) stated his intention to award a cellular licence to a subsidiary of Bell Canada Enterprises (BCE) other than Bell Canada (Bell) so that cellular service would evolve in as unregulated, and as competitive, an environment as possible. The Department of Communications had initially stated that, for each metropolitan area, the operating telephone company would be licensed to provide cellular service, and Bell had, accordingly, submitted a licence application in 1983. While British Columbia Telephone Company (B.C. Tel) was not made subject to a licensing policy similar to that of 13 March 1984, it was informed by the Commission in British Columbia Telephone Company - Portable Communications Division, Telecom Decision CRTC 85-15, 7 August 1985, that the Commission would be prepared not to require the filing of tariffs only if its discretionary portable communications services, including cellular service, were provided through an arm's length affiliated company subject to adequate safeguards to prevent cross-subsidization and the granting of any undue preference or advantage.

In letters to the Commission on 28 June 1985 and 25 October 1985 respectively, Bell and B.C. Tel advised of organizational changes intended to ensure the provision of cellular radio service through arm's length affiliates. Bell advised that a division of Bell Communications Systems Inc. (BCSI), a subsidiary of BCE, was to have provided cellular service, but that this service would instead be provided by Bell Cellular Inc. (Bell Cellular), a subsidiary of Bell Canada Management Corporation (BCMC), which was itself a subsidiary of Bell. The Commission notes that as of 1 January 1987, most former subsidiaries of BCMC, including Bell Cellular, now report to BCE.

In its letter, B.C. Tel advised that B.C. Cellular would operate as a division of Cantel Leasing Ltd. (subsequently renamed Telecom Leasing Canada (TLC) Ltd.), at that time a subsidiary of Canadian Telephone and Supplies Ltd. (CT&S), and that Cantel Leasing would be purchased from CT&S by North-West Telephone, another B.C. Tel subsidiary. B.C. Tel also advised that there would be a contractual relationship between itself and B.C. Cellular whereby the Portable Communications Division (PCD) of B.C. Tel would be managed by B.C. Cellular.

On 22 November 1985, Cantel advised the Commission that it had serious concerns about both of these corporate arrangements. In particular, it was concerned about intercorporate transactions, whether relationships are truly at arm's length, the assignment of cellular start-up costs and access by the cellular subsidiaries to Bell's or B.C. Tel's lists of customers for mobile services. Cantel requested that the Commission institute a proceeding to inquire into these arrangements, and to establish adequate safeguards consistent with section 321 of the Railway Act.

On 19 February 1986, the Commission issued Cellular Radio, CRTC Telecom Public Notice 1986-16 (Public Notice 1986-16) wherein it afforded interested parties an opportunity to make submissions concerning the relationship between Bell and B.C. Tel and their respective cellular affiliates, taking into account the regulatory approach adopted in Public Notice 1984-55. Interested parties were also invited to comment on the adequacy of the safeguards now in place. Interested persons were invited to address interrogatories to the telephone companies and to comment on the issues raised by Cantel and on the responses to the interrogatories that had been addressed by the CRTC to Bell and B.C. Tel prior to this proceeding.

Following the interrogatory process, the following parties filed comment on 16 December 1986: Association of Competitive Telecommunications Suppliers (ACTS); Federated Anti-Poverty Groups of B.C. (FAPG); Cantel; Director of Investigation and Research, Competition Act (the Director); and Thompson Leasing Limited (TLL). The governments of Ontario and Québec addressed interrogatories to Bell but did not file comments.

Bell and B.C. Tel filed reply comments on 16 January 1987.

In addition to this proceeding, issues pertaining to Bell's cellular start-up costs, and to intercorporate transactions in general, were addressed in the proceeding resulting in Bell Canada - Review of Revenue Requirements For The Years 1985, 1986 and 1987, Telecom Decision CRTC 86-17, 14 October 1986 (Decision 86-17). In Decision 86-17, the Commission reviewed Bell policies and procedures respecting intercorporate transactions between Bell and other BCE companies and directed Bell, among other things, to establish procedures for: asses sing purchases from affiliated companies exceeding $500,000 annually; tracking start-up costs from the inception of a project; and extending reporting requirements to include transactions between integral subsidiaries and affiliated companies.

II VALUATION AND REPORTING OF INTERCORPORATE TRANSACTIONS

A. Positions of Parties

In their comments, ACTS, Cantel and TLL argued that fair market value was the most appropriate method for the valuation of intercorporate transactions involving Bell or B.C. Tel and their cellular affiliates. Moreover, they stated that where fair market value cannot be determined for intercorporate transactions, causal cost plus an appropriate contribution should be the standard. These parties also proposed that the appropriate contribution would be 25%, the level which Bell has adopted as its objective for intercorporate transactions generally. TLL further recommended that all transactions be contractual in form and be reported on a quarterly basis.

In his comments, the Director noted that the revised reporting requirements arising out of Decision 86-17 would remedy many inadequacies in the Commission's present review of inter corporate transactions, and should be applied to all federally regulated carriers that have affiliates.

Cantel recommended that Bell's intercorporate transaction reports include transactions between Bell Cellular and other companies in the BCE group. Moreover, Cantel recommended that the reporting threshold be set at only $10,000 to recognize the relative size of cellular radio operations. With respect to B.C. Tel, Cantel and ACTS recommended the extension of reporting obligations similar to those imposed on Bell.

In its reply, Bell noted that the Commission had reviewed the company's Intercorporate Pricing Policy and had determined in Decision 86-17 that the policy did not need to be redrafted. Bell contended that the application of its policy would provide adequate safeguards. Moreover, Bell noted that the Commission had found that the purpose of Bell's policy was to set out general principles for intercorporate transactions, not to set out specific details applicable to every particular case.

Bell also noted that it is already required by the Commission to file quarterly reports on intercorporate transactions between Bell and Bell Cellular or BCMC, whatever the size of the transaction. Bell suggested that it would be more appropriate to introduce a threshold of $500,000, the existing basis for reporting other intercorporate transactions, as a test of significance. Moreover, Bell pointed out that the Commission, in a letter of 27 October 1986 ruling on parties' claims of deficiencies in interrogatory responses, had rejected the extension of the Commission's review to transactions between Bell Cellular and other affiliates in the BCE group over which Bell does not exercise control.

In its reply, B.C. Tel noted that, for the valuation of almost all intercorporate transactions, it employs fair market value or a value equivalent to that charged to other parties for the same service. It noted that, in the case of legal services and employee benefits, it utilizes causal cost. B.C. Tel stated that it expects transactions in the future to be limited to legal services (if used) or employee benefits. Given the limited number and significance of such transactions, B.C. Tel contended that Cantel's proposals were onerous and an attempt to utilize the regulatory process to obtain information on the activities of its competitors. B.C. Tel also denied that there were any intangible benefits to B.C. Cellular which would warrant inflated prices arising from a 25% contribution. It contended that Cantel was seeking, in proposing a mandatory level of contribution, to inflate the operating costs of B.C. Cellular arbitrarily in order to gain a competitive advantage.

B. Conclusions

The Commission considers that it is desirable for obligations pertaining to the valuation of, and reporting on, intercorporate transactions to be similar for both Bell and B.C. Tel. Accordingly, the Commission requires B.C. Tel to file quarterly reports on cellular transactions similar to those presently filed by Bell, subject to modifications required in Part V of this decision.

With regard to the scope of reporting on cellular transactions, the Commission stated in a letter to interested parties dated 27 October 1986 that it did not consider it necessary, within the context of this proceeding, to examine transactions between cellular subsidiaries and other companies over which the telephone companies do not exercise control. Given that the purpose of this proceeding is to ensure that cellular activities are conducted at arm's length from and not cross-subsidized by revenues from regulated telephone company activities, the Commission considers that Bell and B.C. Tel should be required only to report on transactions between the cellular affiliates and the telephone company or any of its directly or indirectly controlled subsidiaries.

With regard to determining the price for the transfer of assets from Bell or B.C. Tel to their respective cellular affiliates, the Commission considers that its approach to the valuation of assets adopted in Decision 86-17 is appropriate. Accordingly, it directs that assets with a readily ascertainable fair market value, such as real estate and buildings, are to be transferred at that value. The Commission directs further that where it is neither feasible nor practical to determine the fair market value of assets, as in the case of assets such as plant and equipment, the assets are to be transferred at net book value.

With regard to operating expenses or labour, for which fair market value cannot readily be determined, the Commission considers that a 25% mark-up should be charged in addition to causal cost. In the Commission's view, such a mark-up will ensure that the price for such transactions includes an appropriate contribution. In the event the telephone companies consider that exceptional circumstances require a mark-up of less than 25%, a rationale for such treatment should be provided in the quarterly cellular reports.

III HISTORICAL TRANSACTIONS

ACTS, Cantel, the Director, FAPG, and TLL all expressed concern about the manner in which start-up and subsequent costs, incurred prior to this proceeding, were determined and recovered. ACTS and FAPG expressed concern that start-up costs not recovered from cellular affiliates are being recovered from rates charged to monopoly subscribers. Cantel and the Director both argued that further examination of such costs is required. Cantel contended that all start-up costs should be allocated to cellular affiliates and that the onus should be placed on the telephone companies to justify any exclusion, on a case by case basis, through application for approval by the Commission.

A. Valuation of Costs

Cantel argued that the criteria used by Bell and B.C. Tel to determine historical costs were not consistently applied within either company. As examples, Cantel noted that Bell had employed: (1) fair market value for real estate leases and equipment supply contracts; (2) accounting record value for assets acquired or constructed prior to 13 March 1984; (3) causal cost plus a contribution for assets acquired or constructed after 13 March 1984; (4) average hourly rates for operating expenses prior to 13 March 1984; and (5) causal cost plus contribution for operating expenses incurred after 13 March 1984.

With regard to B.C. Tel, Cantel noted that: (1) costs related to fixed assets were priced at causal cost, which B.C. Tel equated to fair market value; (2) no operating expenses were recovered for the period prior to 30 September 1985; and (3) subsequent operating expenses appeared to be priced at fair market value with respect to leases, at causal cost with respect to legal services and employee benefits and, with respect to other services, at a price, including a profit margin, consistent with fair market value.

As noted above, Cantel and other parties contended that fair market value was the most appropriate method for the valuation of historical transactions. Cantel also argued that where fair market value was demonstrated to be inappropriate, the appropriate alternative would have been to employ causal cost plus a mandatory 25% contribution consistent with Bell's own policy objective. In this regard, Cantel noted that in 1985 Bell stated that, due to the anti-inflation program, it recovered only an 8% contribution on the labour component associated with fixed asset transfers. Cantel contended that the anti-inflation program should not have been used as an excuse to reduce the contribution level.

Bell noted that at the time that many of the cellular activities were being performed within Bell, the company had not yet fully implemented Phase II causal costing. As a result, the prices for assets acquired or constructed prior to 13 March 1984 were based on the costs that had been taken into the company's accounting records.

For costs incurred for fixed assets after 13 March 1984, Bell stated that it employed causal cost plus a contribution, or fair market value in the case of building space and cell sites. With regard to the 8% contribution level referred to by Cantel, Bell argued that it would have been inappropriate to have charged affiliates higher prices than those charged to any other business customers. Bell contended that for operating expenses after 13 March 1984, the valuation process was fully in accordance with the company's Intercorporate Pricing Policy. Bell also noted that these transactions had been subject to detailed cross-examination during the proceeding resulting in Decision 86-17.

In its reply, B.C. Tel stated that it did not deny the validity of fair market value pricing for parties at arm's length and noted that apart from transactions related to legal and employee benefit services, this had been the basis for the valuation of its cellular intercorporate transactions.

B. Recovery of Costs

1) Bell

Bell indicated that it had recovered from Bell Cellular only a portion of cellular start-up costs incurred prior to 13 March 1984. In particular:

(i) $5,915,000 of the $6,522,000 incurred for fixed assets was recovered; and

(ii) $424,000 of the $4,032,000 incurred for operating expenses was recovered.

Bell argued that because of the Minister's decision not to award the cellular licence to Bell, certain work was rendered valueless. As an example, Bell noted that the Minister's decision required the removal of cellular equipment from Bell premises and its subsequent relocation. Bell contended that since no additional value was added to equipment in its final location, it would have been unreasonable to burden Bell Cellular with duplicate costs associated with relocation and installation of equipment.

In its comments, Cantel noted that Bell may have grounds for excluding those costs associated with fixed assets but argued that the company should be required to apply for and justify such an exclusion.

In regard to operating expenses incurred prior to 13 March 1984, Bell cited the decision of the Minister as a key factor influencing the lack of cost recovery for most expense items. As a result of that decision, Bell contended that a number of items were either of no value, incomplete or proprietary to Bell. As an example, the company noted it had incurred expenditures for the modification of accounting and operating systems and for the development of technical data and training material for use in the company's operations.

In addition, Bell noted that much of the early work on cellular radio was conducted by the company as a pioneer in an untested field. Bell contended that the Minister's decision to require BCE to offer this service through another company, and also to delay the service introduction date, rendered much of the early work valueless. Bell noted that, for many items, more up-to-date information than that which it could have provided to Bell Cellular was readily available in the marketplace.

Cantel argued that all operating expenses incurred by Bell for cellular service should have been recovered from Bell Cellular. Moreover, Cantel noted that, during the proceeding resulting in Decision 86-17, Bell had stated that Bell Cellular had been provided with an opportunity to decide which items it considered to be of value. In reply, Bell contended that it was not unreasonable, given the circumstances of the transfer, to have discussed the various items available in order to determine whether these would be of value to Bell Cellular.

2) B.C. Tel

Cantel noted that B.C. Tel had incurred costs of $406,929 for fixed assets prior to 30 September 1985 and that the company had recovered all these costs from B.C. Cellular. However, Cantel, as well as FAPG and TLL, contended that B.C. Cellular should have been required to pay operating expenses of $38,750 related to the salary of the PCD market manager and associated costs such as cellular training expenses.

In response, B.C. Tel noted that the work done by this manager was part of its normal telephone activities of evaluating the potential for new services. B.C. Tel contended that this cost would have been incurred even if the company had subsequently chosen not to enter the market.

D. Conclusions

The Commission's primary purpose for reviewing historical transactions in this proceeding was not to determine whether to allow or disallow specific telephone company expenses, as would be the case in a revenue requirement proceeding, but rather to examine information which would provide an indication of the reasonableness of Bell's and B.C. Tel's approach to cellular intercorporate transactions. Assessment of these transactions was of material assistance to the Commission in determining the adequacy of the present safeguards.

Having examined the record on historical transactions, the Commission makes the specific findings out below.

(1) The Minister's licensing policy decision not to award a licence to Bell created a set of circumstances over which the company had no control given its expectation that it was to have been licensed to provide cellular service. Bell's argument that much of its preparatory work was rendered valueless to Bell Cellular is reasonable. Moreover, the Commission considers that it would be inappropriate to burden Bell Cellular with start-up costs in relation to which there were no tangible benefits.

(2) The criteria used by Bell to establish costs were reasonable. Given that Bell had fully intended to provide cellular service in-house, it is not unreasonable that pre-13 March 1984 costs and transfer prices should have been based on the value of assets taken into the accounting records or on average hourly rates.

(3) It would not be appropriate to require that cellular affiliates be charged additional amounts commensurate with a requirement for 25% contribution on past transactions. While the Commission notes that not all historical transactions included a 25% contribution, it also notes that there was no obligation on Bell or B.C. Tel to include such a contribution in the transfer price. Moreover, a 25% contribution rate may be inappropriate under certain circumstances since it could result in prices greater than fair market value. In this regard, the Commission notes that Bell did recover a contribution of approximately 25% on operating expenses incurred after 13 March 1984.

(4) In regard to the low level of contribution on Bell's labour component in 1985, the Commission notes that contribution levels were applied equally to all customers. Bell's approach seems to have been reasonable under the circumstances.

(5) In regard to operating expenses incurred by B.C. Tel, the Commission considers that there is some merit in B.C. Tel's position that the expense associated with the PCD manager's salary was incurred as part of a normal on-going process of assessing market potential. Moreover, in the Commission's opinion, the licensing and regulatory events at the time were ambiguous enough to make it unclear as to whether cellular service would be provided in-house or through a subsidiary.

IV OTHER ISSUES

A. Financing

Both ACTS and Cantel raised concerns about financial arrangements. ACTS contended that the Commission should determine the level and sources of third party financing to ensure that affiliate financing is on an arm's length basis. Cantel submitted that the cellular affiliates should be required to pay standby fees or commissions for the availability of such financing.

In its reply, Bell contended that it is neither appropriate nor common practice for a subsidiary to pay its parent a sales commission for regular infusions of equity capital. In Bell's opinion, a parent like BCMC is not the same as a financial intermediary. Moreover, Bell noted that a review of Cantel's major shareholders (Rogers Telecommunications, Ameritech and First City Financial Corporation) provides a clear indication that equity financing is available to Cantel as well. B.C. Tel noted that, while it is standard practice for third parties to receive commissions, such a third party relationship did not arise in the case of B.C. Cellular.

In regard to third party financing for cellular subsidiaries, both Bell and B.C. Tel stated that they did not provide comfort letters or guarantees. In the opinion of the Commission, the positions of Bell and B.C. Tel regarding financing arrangements are reasonable. The Commission does not consider that it would be appropriate to require subsidiaries to pay standby fees or commissions to their parents for infusions of equity capital. Moreover, as stated in its letter of 27 October 1986 and earlier in this decision, the Commission does not consider it necessary to examine transactions between cellular subsidiaries and other companies, including financial institutions, over which the telephone companies do not exercise control. The Commission notes that neither Bell nor B.C. Tel provide any guarantees with respect to debt financing.

B. Interlocking Directors and Officers

Cantel recommended that, in order to avoid conflicts of corporate interest, no director or officer of a cellular affiliate should be a director, officer or employee of any other corporation in the telco group. ACTS contended that joint directors are acceptable but that no officers of the telephone company should be directors of its cellular affiliate due to the fact that such officers are instrumental in running the monopoly business.

Bell contended that Cantel's recommendations were inappropriate in that they would interfere with management's prerogative to act in the best interest of affiliated shareholders. B.C. Tel noted that it had certain separations in place and that no directors of B.C. Cellular are involved in the day-to-day activities of B.C. Tel.

In the opinion of the Commission, Cantel's proposal for a blanket prohibition would unduly limit management responsibilities to act in the interests of affiliated shareholders. However, it should be a matter of corporate policy that no exchange of proprietary information occurs as a result of a director, officer or employee of a telephone company or any of its direct or indirect subsidiaries also serving as a director, officer or employee of a cellular affiliate. Moreover, where such dual responsibility exists, adequate compensation should be provided by the cellular affiliate.

C. Joint Marketing and Advertising

TLL and FAPG expressed concern about the relationship of B.C. Tel and B.C. Cellular in the area of joint advertising and marketing. TLL noted that: B.C. Tel advertisements for a range of competitive services included visual reference to cellular service; B.C. Cellular uses the B.C. Tel logo to advertise; and B.C. Cellular had, on one occasion, shared a promotional booth at a trade show with the B.C. Tel Group. TLL recommended that the Commission order that B.C. Tel cease to engage in joint advertising or marketing with B.C. Cellular and no longer allow B.C. Cellular to use the B.C. Tel logo or name. Moreover, TLL contended that B.C. Tel should charge B.C. Cellular for past activities.

In its reply, B.C. Tel argued that the joint advertising at issue is used to promote the activities of the B.C. Tel Group as a leading edge supplier of a wide range of products and services, rather than to market particular products. In addition, the company argued that it is common practice in advertising to identify a parent or affiliation and, moreover, that TLL had offered no evidence to indicate that Cantel was placed at a competitive disadvantage by such practices.

With respect to the joint display, B.C. Tel noted it was jointly funded by B.C. Tel and the producers of the exhibition as an education/ entertainment device to promote the theme of the show. The company noted that B.C. Tel, its Business Telecom Equipment Division (BTE) and B.C. Cellular all had separate displays for marketing purposes.

The Commission does not consider that the activities of B.C. Tel, noted by TLL, are inconsistent with the stated intentions of the company not to engage in joint marketing and advertising. In its opinion, references to cellular radio in institutional advertising or activities intended to promote the image of the B.C. Tel group of companies do not raise the same concerns as would activities related to marketing and promotion of particular cellular products and services. Further, the Commission considers that, while the use of the B.C. Tel logo by B.C. Cellular takes advantage of its corporate family relationship, such practice does not provide it an undue preference or advantage.

Given the nature of the activities complained of and the stated intentions of the companies not to engage in joint activities related to the marketing of cellular products and services, the Commission sees no requirement to impose any additional safeguards in this area at the present time.

D. B.C. Cellular Involvement in the Portable Communications Services of B.C. Tel

ACTS, Cantel, FAPG and TLL expressed concern about the potential for cross-subsidy and anti-competitive behaviour resulting from the management of the PCD by B.C. Cellular. In particular, these parties expressed concern that: (1) B.C. Tel was, through rate adjustments to conventional services, causing customer migration to cellular service; (2) assets and losses remain in the PCD while B.C. Cellular (a competitor) receives revenues in the form of management fees; (3) management fees present a clear opportunity for cross-subsidy; and (4) B.C. Cellular employees have access to conventional mobile and monopoly telephone customer information. Both Cantel and TLL recommended a termination of this relationship.

In its reply, B.C. Tel contended that: B.C. Cellular possesses the necessary expertise to manage the PCD efficiently; separate management of the PCD would increase its costs; management fees are fair, reasonable and subject to CRTC scrutiny; and access to telephone company information is limited to B.C. Cellular employees that deal with PCD accounts. With regard to B.C. Tel strategies for conventional mobile services, the company noted that: cellular service is only available in two specific locations and, thus, not competitive with other services throughout the territory; the decision to phase out its conventional manual service (Mobiltel) was purely economic and taken before the introduction of cellular; and adjustments to its automatic radio-telephone service (Autotel) rates were made to make that service more attractive relative to cellular.

In the opinion of the Commission, the management of the PCD by B.C. Cellular is not consistent with an arm's length relationship. Not only does there exist considerable potential for cross-subsidy but the relationship permits a competitive business, B.C. Cellular, access to telephone company information creating a potential undue preference for B.C. Cellular relative to Cantel. In addition, it creates a potential for conflict of interest in the management of competing services. Accordingly, noting that the Commission's decision not to require tariffs of tolls to be filed and approved in advance was conditional on there being adequate safeguards in place to ensure that cellular activities are conducted at arm's length from regulated telephone company activities, the Commission has concluded that B.C. Tel must terminate the management of the PCD by B.C. Cellular.

With regard to the allegations of TLL that B.C. Tel is adjusting conventional mobile rates in order to migrate conventional customers to cellular, the Commission notes that such rates are the subject of regulatory scrutiny and approval.

E. Access To Information

ACTS, Cantel, and TLL expressed concern about the potential for anti-competitive behaviour that could arise where the employees of a cellular affiliate have access to telephone company customer information, particularly other mobile service customer information. ACTS noted B.C. Cellular's access to PCD information (see (D.) above) and what it perceived as Bell's intention to fold its existing mobile services into Bell Cellular. ACTS contended that either affiliate should have access to information from the carrier regarding mobile services unless the carrier is willing to provide identical information to Cantel.

While Cantel expressed some concern about Bell Cellular access to Bell information and potential future abuse should Bell's existing mobile business be transferred to Bell Cellular, like TLL it focused its attention on the PCD relationship. TLL noted that, in addition to access to PCD information, B.C. Cellular employees, through customer records and information system (CRIS) terminals, have access to monopoly customer information, including that concerning Cantel and its customers. TLL recommended that access to CRIS terminals by B.C. Cellular staff be prohibited and the terminals be removed from B.C. Cellular premises.

In reply, B.C. Tel stated that access to information via CRIS is restricted to B.C. Cellular employees that deal with PCD accounts. B.C. Tel noted that such employees require password access codes and operate under direct supervision of the service centre manager.

Bell noted that it had no intention of transferring its remaining mobile services to Bell Cellular and contended that arguments based on such a misconception should be disregarded. Bell also stated that its employees have been specifically instructed not to permit access to any customer record information by either Bell Cellular or Cantel.

While ACTS proposed an approach which would give Cantel access to customer information where cellular affiliates have such access, the Commission considers it more appropriate that the telephone companies not provide their cellular affiliates any access to their competitive or monopoly customer information. Accordingly, the Commission concludes that the staff of cellular affiliates should not be provided access to telephone company customer information.

F. Referrals

In its comments, Cantel noted that Bell's procedures, unlike B.C. Tel's, do not require the identification of both cellular providers if telephone company staff receive cellular inquiries. Bell stated that its policy is to have contact personnel simply state that Bell does not offer cellular service, without identifying who does.

In regard to customer referrals, the Commission considers that either telephone company reference to both cellular providers, in a neutral fashion, or to neither is reasonable. What is important is that inquiries concerning cellular service are handled without preference.

G. Payment of Deemed Return

Cantel contended that the cellular affiliates should be required to pay a deemed return to their shareholders out of operating income in order to ensure that the companies are managed to achieve such a return and thus are unable to compete unfairly with Cantel.

With regard to a requirement for a deemed return, Bell contended that the Commission already has safeguards in place to deal with non-integral investments and that Cantel's proposal involves a significant intrusion on management's prerogatives. B.C. Tel also stated that the present deemed return on non-integral investments is adequate protection for monopoly subscribers and that Cantel's proposal to have B.C. Cellular actually pay the deemed return is artificial, harmful and an attempt to enhance Cantel's competitive position.

The Commission does not consider that payment of a deemed return by the cellular affiliate to its shareholder is appropriate or necessary. As noted in the Commission's letter of 27 October 1986, the performance of the cellular subsidiaries is not at issue in the proceeding except insofar as it can be directly linked to the question of whether cellular activities are being conducted at arm's length from regulated telephone company activities.

H. Degree of Focus on Arms's Length Relationships

In addition to its concerns about arm's length relationships expressed above, Cantel provided further instances of what it alleged were practices that demonstrated less than arm's length relationships. In the case of Bell, these included: (a) vague price adjustment principles for start-up costs; (b) the ease with which the transfer of cellular service to BCSI was reversed; (c) the participation of Bell Cellular in Telecom Canada activities; and (d) Bell's implicit admission that Bell Cellular does receive advantage or preference from its relationship with Bell but that these are not undue.

In reply, Bell submitted that all attributes of an arm's length relationship cannot be achieved where affiliates are involved. Bell contended that one must focus broadly on the degree of control exerted to determine if there is a likelihood of detrimental effects on subscribers or any undue preference. Bell noted a that the price adjustment clause in question had resulted in adjustments to the transfer price of cellular service in Bell's favour. With respect to Telecom Canada activities, Bell noted that Bell Cellular had participated in two meetings of an informal working group, since disbanded, and was not involved in the ongoing activities of Telecom Canada related to technical planning and co-ordination.

With regard to B.C. Tel, Cantel noted: (a) B.C. Tel's refusal to supply Cantel with facilities (real estate) it provides to B.C. Cellular; (b) the marketing by B.C. Tel of cellular telephones; (c) the use of test equipment by B.C. Cellular which was not transferred; and (d) the retention of seniority in B.C. Tel for employees transferred to B.C. Cellular.

In its reply, B.C. Tel contended that: (a) the B.C. Tel Group is not obliged to assist its competitors by providing them with real estate; (b) B.C. Cellular is not involved in any way in the marketing of cellular equipment by BTE; (c) PCD test equipment has no use in the testing of cellular facilities; and (d) B.C. Cellular is covered by the current collective agreement between B.C. Tel and the Telecommunications Workers Union and it is, therefore, correct to recognize union seniority.

In addition to the matters noted above, Cantel also cited the lack of participation in regulatory proceedings by the cellular affiliates as an indication that there is not an arm's length relationship between the telephone companies and their affiliates. Cantel recommended that the affiliates bear Bell's and B.C. Tel's regulatory costs so that they are not insulated from the costs of a proceeding in which they have a clear interest. B.C. Tel stated that the intent of the present proceeding was to inquire into the activities of B.C. Tel in respect of B.C. Cellular and not to inquire into the activities of B.C. Cellular.

In the opinion of the Commission, the examination in this proceeding of arm's length relationships between affiliated companies should focus on the criteria set out in Public Notice 1984-55 and in Decision 85-15.

In Decision 85-15, the Commission noted that it would be "prepared not to require the filing of tariffs for B.C. Tel's discretionary portable communications services should they be provided through an arm's length affiliated company subject to adequate safeguards to prevent cross-subsidies and any undue preference or advantage."

The Commission does not consider that there was or is any cross-subsidy or any undue preference or advantage accorded in the examples set out above by Cantel.

In regard to participation of the cellular affiliates in this proceeding, the Commission notes that it previously advised Cantel by letter of 26 March 1986 that such participation was not necessary for Cantel to obtain the information it required. Accordingly, the Commision denied Cantel's request that the cellular affiliates be made parties to the proceeding. The Commission does not consider it appropriate to impose costs on the affiliates for a proceeding initiated to examine the activities of the telephone companies.

V IMPLEMENTATION

(1) B.C. Tel is directed to file with the Commission quarterly reports of intercorporate transactions, excluding tariffed services, between B.C. Cellular and B.C. Tel or any of B.C. Tel's directly or indirectly controlled subsidiaries. B.C. Tel's first quarterly report should cover the period ending 30 September 1987.

(2) Bell and B.C. Tel are directed to include in their quarterly reports of intercorporate transactions, in addition to what is presently included in Bell's reporting format, itemized lists of assets and expenses broken out into causal costs (or other valuation) and amount and percentage of contribution. In this regard, Bell and B.C. Tel are directed to employ the same format as in Bell(Cantel)4April 86-2CR, Supplemental Attachment I and Bell(Cantel)4April86- 5CR, Supplemental Attachment I filed 17 November 1986.

(3) B.C. Tel is directed, by 23 November 1987, to provide a report to the Commission detailing the revised arrangements that have been made for the management of the PCD.

(4) B.C. Tel is directed to provide a report to the Commission by 23 November 1987 detailing the safeguards it has put in place to ensure that B.C. Cellular staff no longer have access to B.C. Tel customer information.

Fernand Bélisle
Secretary General